China cuts bank reserve requirement to spur economy amid trade war

Gladys Abbott
January 7, 2019

"We will maintain reasonable and sufficient liquidity, maintain reasonable growth in the scale of money and credit and social financing, stabilize macro-leverage, and seek internal and external balances", it said. But they note policy transmission difficulties faced by the central bank to boost credit for private and small firms - which are vital for economic growth and jobs.

The reserve requirement ratios are now 14.5% for large banks and 12.5% for smaller banks. "As a result, tight financial regulation and control of the real-estate sector is necessary".

The measures will also included targeted RRR cuts aimed at supporting small and private companies, Li was quoted as saying in a statement on the website of the Chinese government.

The annual Central Economic Work Conference set the monetary policy tone as prudent in 2019. In addition, the PBOC launched an innovative monetary policy tool called the targeted medium-term lending facility (TMLF) to provide stable funds to commercial banks.

The policy move was announced hours after Chinese Premier Li Keqiang told the central bank to make universal cuts of the ratio as part of Beijing's efforts to bolster economic growth having cut the RRR four times previous year. Zhang Yu, a research director at Huachuang Securities, thinks there could be an RRR cut in mid-January. Other factors, including banks' capital base and the volume of high-quality credit demand, are also important in influencing the credit growth pace in China.

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The order from Li to the central bank, which is part of the Chinese government, showcased Beijing's willingness to go further in policy easing to keep its economic growth on track. It also highlighted maintaining market liquidity at a reasonably ample level.

According to a survey released by the PBOC on Christmas Eve, in the fourth quarter 81.2pc of the participants from the banking sector said the current monetary policy is "appropriate", 4.1 percentage points higher than in the third quarter. "The central bank has been handing liquidity to the banks, but the banks are unwilling to lend".

But with the news, released on Wednesday evening, failing to specify an exact figure, the fact that estimations range from 400 billion yuan (US$58.27 billion) to as much as 700 billion yuan (US$101.97 billion) is seen to reduce the transparency of the policy, making it hard to calculate the exact effectiveness.

This article was originally produced and published by China Daily.

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